Last Friday, Judge Crotty denied the attempt of three former Fannie Mae executives to dismiss the SEC’s charges that they mislead investors about the company’s exposure to subprime mortgages. Judge Crotty found that the SEC had adequately alleged that Fannie Mae’s “quantitative subprime disclosures were misleading” because “they failed to include all loans that fell within [Fannie Mae’s] subprime and Alt-A description.” In allowing the SEC’s civil fraud suit to proceed, Judge Crotty rejected the defendants’ argument that they were exempt from liability because the Securities Exchange Act of 1934 does not apply to employees of any “independent establishment of the United States,” and Fannie Mae, as a government-sponsored enterprise chartered by the federal government, qualifies as such an establishment. Although Judge Crotty held that Fannie Mae is a government instrumentality, he concluded that it is not an “independent establishment” within the meaning of the Act given that it is a publicly-traded corporation managed and controlled by a Board of Directors elected by its shareholders.
Continue Reading Judge Crotty Rejects Ex-Fannie Mae Executives’ Bid to Dismiss SEC Charges

Last Wednesday, Judge Rakoff explained why, back in February, he denied ex-Citigroup executive Brian Stoker’s motion to dismiss the SEC’s enforcement action against him. As we previously blogged, the SEC has charged Stoker with securities fraud in connection with a CDO that he allegedly helped to create and market. The SEC contends that Stoker failed to disclose to investors that Citigroup influenced the selection of the CDO’s assets and then shorted those assets. Judge Rakoff’s decision is significant in two respects. First, it holds that to state a claim under Section 17(a)(2) of the Securities Act of 1933, the SEC is required to allege only that a defendant “obtained money or property for his employer while acting as its agent” or, alternatively, that the defendant “personally obtained money indirectly from the fraud.” While acknowledging that the case law is “surprisingly sparse, and inconclusive” on this point, Judge Rakoff rejected Stoker’s argument that Section 17(a)(2) requires that a defendant must have personally obtained money or property by means of the alleged misleading statements or omissions.
Continue Reading Judge Rakoff Explains Denial of Ex-Citigroup Executive’s Motion to Dismiss SEC Action